How Credit Score Affects Your Home Loan

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Your credit score is crucial when you are applying for a home loan. Lenders, upon knowing what your credit score, can fairly estimate the quality of your credit, or the amount of risk that may be involved in extending you a loan.

What Does Your Credit Score Represent?

Stated by a credit repair expert, think of your credit score as your financial ID – a credit qualifier. It is a 3-digit figure that represents your overall credit history and behaviors. Your credit score is regularly updated based on your current activities or transactions with your banks, other lenders, merchants, and even your landlord.

Lenders use your credit score, along with your other important credit documents, to determine what type of loan program to give you and what interest rates to apply. In general, a bad credit score will cause your home loan to be more expensive than what others with a good score would have paid for the same amount of loan. Likewise, based on a FICO research and analysis, your credit score can also reveal your potential for default – a piece of information that your lenders find most valuable.

What Is The Minimum Credit Score For A Home Loan?

The minimum credit score required to apply for a home loan varies depending on the mortgage type. There are three mortgage types available to borrowers:

Conventional Mortgage

These are home loans that follow the standards set by Fannie Mae and Freddie Mac. If you have a FICO score of 740 or higher, you may be able to qualify for this type of loan with low down payment requirements, competitive interest rates, and flexible repayment terms that are up to 30 years. A minimum credit score of 620 is required to qualify.

Federal Housing Administration (FHA) Loans

These types of loans are government-backed, making them less risky to lenders. These types are also easy to qualify for, requiring only a minimum credit score of 500 and 580, and with a 10% and 3.5% down payment requirement, respectively.

Veterans Affairs (VA) Loans

This type of home loan is most economical because if you meet all the requirements, this federal-insured loan will not require you any down payment. Borrowers with low credit scores may also qualify for this loan.

How To Prepare Your Credit For A Home Loan?

As mentioned, your credit score is just one of the factors that your lenders consider in their analysis before deciding to extend credit to you. It pays to know what these are so you can better prepare yourself for credit scrutiny by your lenders.


If you have multiple streams of income, prepare your documents to prove how secure these are. Don’t forget to include any investment income that you may have that you plan to use for the repayment of your mortgage.

Employment History

Lenders would like to have a good estimate of your security of tenure by looking at your employment history. If you are working for more than two years in a stable company, then you are more likely to stay there for much longer. If you hold an executive position in your company, then you’re more likely to get promoted to a higher-paying position later on.

Debt-to-Income Ratio

This ratio shows how much of your gross income goes to paying off your total debts, including your estimated new mortgage. Lenders would like to see no more than 43% of this ratio for you to qualify for the loan.


Putting down a bigger amount of down payment will help you qualify for a loan much faster, and with a lower interest rate. Lenders minimize their risk when they know you are also willing to risk a significant amount of money into your loan.

Savings and Investments

Lenders would like to know how much you have in savings or investment, and how available these are for payments, in case your income is unexpectedly disrupted. Generally, they would like to see if you have enough to cover for at least two months’ worth of mortgage payments.

If you keep these factors in mind and put them in order, you will gain higher chances of getting approved for that home loan.

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